Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) still looks extremely undervalued. This is based on both analysts’ estimates for revenue next year and its ability to generate huge amounts of free cash flow (FCF). As a result, I now estimate that GOOG stock is worth at least 38% more at $3,931 per share.
This is even higher than the target price of $3,905 that I wrote almost 2 months ago on Oct. 28. This was after Alphabet first released its stellar Q3 earnings report. I used information from that report to make my target price.
For example, at the time I looked at its huge FCF margins and also analysts’ estimates. I based my target price on a 28% FCF margin going forward. In addition, I used analysts’ average 2022 revenue forecast of $297.23 billion, as measured by Seeking Alpha.
Where Things Stands Now
However, since then GOOG stock has been flat to down. On Oct. 26, when Alphabet released earnings, the stock was at $2,793.
Moreover, on Oct. 28, when my last article on GOOG stock was published, it was at $2,922 per share. Since then it was drifted lower. So as of Dec. 3, GOOG stock closed at $2,850.41, down 2.45% since Oct. 28.
But here is the point. We can’t set our valuation on a stock based on how the market is currently feeling about the company. The valuation for GOOG stock has to be based on an objective set of measures.
For example, since Oct. 28, analysts have slightly raised their revenue targets for Alphabet. Now the average estimate is $297.47 billion, up slightly from $297.23 billion.
That little bit still makes a difference. For example, using a 28% FCF margin implies that FCF will hit $83.29 billion in 2022.
Therefore, after using an FCF yield metric of 3.2% as in my last article, the implied target market cap will be $2.603 trillion. This is 37.9% higher than the present market cap of $1.888 trillion, according to Yahoo! Finance.
In other words, the new target price will be 37.9% higher than today’s price of $2,850.41. That puts the target price at $3,931 per share, as I mentioned earlier. In other words, an objective analysis shows that GOOG stock is worth significantly more. This is even better than my prior price target of $3,905.
What to Do With GOOG Stock
What is driving this analysis is the fact that Alphabet, the parent company over Google, makes a ton of free cash flow. It is simply a cash cow, piling up cash from its massively profitable operations.
At some point, the market will appropriately recognize this. Just not right now for whatever reason. For example, some may be taking profits based on the stock’s stellar rise so far this year. It is up 62.7% so far year-to-date (YTD). Moreover, most of the year it has been climbing. That means that most who bought in during the year have profits.
Analysts are now starting to revise their prior price targets much higher and closer to my estimate. For example, TipRanks now says that the average of 29 analysts’ price target is $3,356.96. That represents a potential gain of 17.8% over today’s price. It is also higher than their previous average of $3,289.58 on Oct. 28.
The same is true in Seeking Alpha’s survey of 48 analysts who now have an average price target of $3,360 per share. That represents a potential gain of 17.9% over today’s price of $2,850.41. It’s also higher than their previous average of $3,301.54 as of Oct. 28.
The point is that anyone with an objective analysis of how extremely profitable Alphabet really is ends up with a higher price target each quarter. This is because the company continues to pump out higher levels of free cash flow on a consistent basis.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com runs the Total Yield Value Guide which you can review here.